Comprehensive Guide to Sukuk Governance Standards by AAOIFI
"Discover the AAOIFI's Sukuk Governance Standard, covering key definitions, management structure, objectives, pre-issuance considerations, and more for robust sukuk management and transparency in the market."
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Sukuk Governance Governance Standard (ED) Mohammad Majd Bakir Director, Professional Standards Development,AAOIFI BorsaIstanbul , OICExchanges Forum 26 September 2019
2 AAOIFI Exposure draft/ AAOIFI s website: http://aaoifi.com/wp-content/uploads/2018/12/Sukuk-Governance-Exposure-Draft-Final-for- Publishing-1.pdf Otherstandards on sukuk,developed byAAOIFI: Financial accounting standard No. 29 Sukuk Issuances Financial accounting standard No. 33 Investmentin Sukuk,Shares, and Similar Instruments Financial accounting standard No. 34: Financial Reportingfor Sukuk holders
Content 3 AAOIFI 9 01 05 5 Management Structure Objectives 02 06 10 6 Scope Pre-Issuance Considerations 03 7 07 11 Key Definitions Considerations During Continuity 04 8 08 12 Pillars and Principles Changes Before Maturity
Content (contd) 4 AAOIFI 01 13 Considerations at Maturity/ Liquidation 02 14 Transparency and Disclosure 03 15 Effective Date
Objectives 5 AAOIFI The standard sets out principles aiming to attain: standardization of global practices robust coverage of relevant areas (transparent issuance and management) The standard prescribes standardization requirements for the entire life cycle of sukuk (issuance, management, maturity or termination, and restructuring). Comprehensive coverage Framework Enhanced governance Increased trust in Sukuk markets
Scope 6 AAOIFI Responsibility: Rests charged governance originator s management Sukuk program: A series of Sukuk issuances or multiple tranches: each issuance/ tranche shall fulfill the requirements of this standard. Setting framework for the overall lifecycle of Sukuk, including phases of: Issuance Investment Maturity/ termination Restructuring out governance with those with +
Key Definitions 7 AAOIFI Originator Shari ah principles and rules Those charged with governance An IFI or other institution that issues sukuk directly or through an SPV or similar mechanism For the purpose of this standard, this shall be defined according to the following hierarchy: Shari ah standards. Regulations Rulings of CSB. Requirements of FAS Approvals and rulings of SSB Persons responsibility for overseeing the strategic direction of the entity and obligations accountability of the entity. Overseeing financial process. This may include members of a governance board, an owner-manager, of the originator, with regards to sukuk issuance. or organizations with relating to reporting executive
Sukuk Governance: Key Pillars and Principles 8 AAOIFI Principles Key Pillars Effective Shari ah compliance structures Fair treatment of stakeholders Equitable and fair treatment of Sukukholders Effective oversight Audits, internal controls compliance Risk management Avoidance of conflict of interest Appropriate compensation policy oversight Public disclosures Code of conduct and code of ethics Appropriate enforcement principles and standards Shari ah compliance Accountability Fairness Transparency Responsibility and Shari ah of governance
Sukuk Governance and Management Structure 9 AAOIFI All these organs shall be responsible for compliance with the requirements of this standard. Originator s responsibility responsibility of those governance and the management of the originator. Organs of governance/ management A normal Sukuk issuance has the following organs: Those charged with governance Management SSB of Sukuk (SSSB) Trustee Internal audit function External auditor External Shari ah auditor = collective charged with
Pre-Issuance Considerations 10 AAOIFI Regulatory/ Prudential Requirements Sukukholders representative Eligibility criteria for issuance of sukuk Regulatory approvals for issuance of sukuk Prospectus Special purpose vehicle (SPV) Trading and listing of Sukuk Appointment and independence of trustee Underwriting of Sukuk issuance Shari ah supervisory function Sukuk appointment/ composition Shari ah Supervisory Board Agency relationships Initial Shari ah approval and Fatwa
Considerations during continuity of Sukuk 11 AAOIFI Responsibilities of SSSB General meetings Periodic report (to those charged with governance) Responsibilities of originator oversight and routine Utilization of Sukuk proceeds Management of Sukuk assets Contractual compliance Sukuk related guarantees/ undertakings Originator s responsibility for compliance Changes in SSSB Internal audit Compliance with requirements of this standard Compliance with contractual terms Adequacy/ accuracy of financial reporting Compliance with regulations/ Shariah Change in Fatwa Provisional Fatwa Final Fatwa
Considerations on Changes before Maturity 12 AAOIFI Termination of Sukuk On regulatory and SSSB approvals. When: Parties to sukuk mutually agree. Originator exercises its unilateral option (call option) of early redemption. Trustee or sukuk holders or their representative exercise their option of unilateral termination Regulators orders an early termination. Restructuring of Sukuk This may take place in two scenarios: As a result of originator s default, actual or potential As a result of acquisition, merger, or corporate restructuring of originator. Governance requirement: Communication of the objectives Thorough review proposition, and approval by SSSB Compliance with Shariah. Conditions: SSSB approves its modus operandi Due deliberations and communication with all Stakeholders No unjustifiable material loss to sukuk holders of restructuring
Considerations at Maturity / Liquidation 13 AAOIFI SSSB s responsibility SSSB shall supervise the process. Considering the financial reporting and reports of external auditors. SSSB issues its final report on sukuk issuance Originator s and trustee s responsibilities Originator and trustee shall ensure that maturity and liquidation of Sukuk assets is carried out in line with requirements set out in the transaction structure and in line with Shari ah.
Transparency and Disclosure 14 AAOIFI Financial reporting Financial reporting by originator Financial reporting for Sukukholders Overall considerations for transparency and disclosure Prospectus Financial reporting and disclosures at termination / liquidation Rating of Sukuk and originator External audit of financial reporting to Sukukholders External Shari ah audit Annual review meeting of Sukukholders Special consideration during audit of financials of originator
Effective date Beginning on or after 1 July 2020 Earlier adoption is encouraged
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